WESTERN SKIES - July 30, 2005

*** PUHCA REPEAL ***

ERIC WHITNEY: The energy bill that Congress passed yesterday weighed in at over seventeen hundred pages, covering everything from nuclear power to energy efficient appliances in public housing projects. One part of the bill that didn't attract much attention nonetheless could have big impacts. It's the repeal of the Public Utility Holding Company Act, a law originally passed in 1935. Stephen Raher has this report on what the repeal means for utility customers.

STEPHEN RAHER: The Public Utility Holding Company Act, or PUHCA, has been around for seventy years. That is, until it was quietly repealed last week. Consumer advocates are opposing the repeal, saying that customers will be hurt by the mergers and consolidations that are sure to follow.

LYNN HARGIS: You know Enron, I'm afraid, is going to look like an hors d'ourve.

RAHER: Lynn Hargis is an attorney with Public Citizen, a watchdog organization founded by Ralph Nader. She supports the current law, under PUHCA, which regulates utility holding companies that operate across state lines. The regulations are designed to prevent what happened in the 1930s when large corporations bought utility companies for their dependable revenue streams. They then borrowed against their utility assets to finance other unrelated business ventures. But when the stock market crash came, the holding companies found themselves highly leveraged and unable to pay their debt.

HARGIS: PUHCA defines who can own a utility in the United States. And they have to get rid of their non-utility businesses. So that's a huge thing, because essentially we are throwing, like, one trillion dollars worth of electric utility and natural gas assets onto the world, the global market. You know, it's going to be a shark feeding frenzy.

RAHER: But advocates for the repeal say that getting rid of cumbersome Depression-era regulations will allow free markets to lower energy costs and allow utility managers to make business decisions without government interference. Peter Van Doren is the editor of Regulation, a quarterly journal published by the Cato Institute, a think tank that promotes free markets. He says PUHCA is bad for the utility industry, and by extension, bad for customers.

VAN DOREN: It restricts competition in capital markets. So instead of having capital flow into and out of the utility sector easily, it in effect it's restricted.

RAHER: In other words, says Van Doren, regulation has made investing in utilities less attractive. So utility companies must compensate for this by paying higher dividends, a cost that is ultimately passed on to consumers.

VAN DOREN: My view, I want to turn everything upside down and say I think the strict economics of this strike me as pro-consumer and not anti-consumer. And that the obsession about mergers and things like that is missing the point that the existing statute in effect raises the effective return on capital in that sector and thus indirectly raises the prices that consumers have to pay.

RAHER: Lawmakers found themselves in the middle of this debate. But despite strong feelings on the part of advocacy groups, PUHCA repeal wasn't too contentious of an issue in the conference committee.

SEN. JEFF BINGAMAN: Well yes, I do think it's a good compromise.

RAHER: Senator Jeff Bingaman of New Mexico is the ranking Democratic member of the Senate energy committee and he also served on the joint House-Senate conference committee for the energy bill. He says he would have preferred the original Senate language, but overall he is satisfied with the final version of the PUHCA repeal.

BINGAMAN: So I've insisted that as part of that repeal, we ensure that the Federal Energy Regulatory Commission has what additional authority they need to perform this oversight and monitoring function.

RAHER: But Bingaman's reliance on the Federal Energy Regulatory Commission, or FERC, does not satisfy Lynn Hargis of Public Citizen.

HARGIS: You know, FERC is nothing. First of all, FERC has never seen a merger they couldn't approve. The huge problem that ought to be clear to everyone is FERC is basing its deregulation of wholesale power on the idea that there's lots of competition and the market can take care of it. Once PUHCA is repealed, everyone agrees there's going to be massive consolidation of utility ownership. So where is all this competition that FERC is relying on?

RAHER: Peter Van Doren of the Cato Institute says the problem is largely in the politics of the matter. He says politicians are hesitant to push for further electricity deregulation because of what happened in California. Even though the California approach was only a partially deregulated system, that never provided the benefits of a truly open market. And as for the Enron references:

VAN DOREN: Energy policy doesn't have much to do with Enron. If bad companies purchase utilities and then go bankrupt, the utility would operate under bankruptcy just like United or USAir is operating under bankruptcy. But shareholders would lose all their money.

RAHER: And it's Van Doren's position that government policy should not be focused on artificially minimizing investor risk.

It's hard to say how all of this could effect Colorado. Currently the only utility in the state that is regulated under PUHCA is Xcel Energy. Company spokeswoman Margarita Alarcon says Xcel supported the repeal, but she doesn't think it will immediately impact their business plans.

MARGARITA ALARCON: We don't have any major business changes that are going to be directly effected by this repeal.

RAHER: Peter Van Doren, for one, is not surprised by Xcel's lack of immediate plans.

VAN DOREN: Seventy years of regulation have created a set of incentives and a corporate culture that is pretty risk-averse and pretty used to regulation. So, the sort of "best and the brightest" MBAs do not go into the utility sector in the U.S.

RAHER: But all that may change now that Congress has passed the repeal of the Public Utility Holding Company Act of 1935. The energy bill now heads to President Bush, who is expected to sign it into law.

For Western Skies, I'm Stephen Raher.